SEC Investor Advisory Committee Reviews Draft Recommendations

The SEC Investor Advisory Committee ("IAC") reviewed draft recommendations on (i) single-stock exchange-traded funds, (ii) proposed amendments to certain reporting requirements and (iii) third-party oversight of investment advisers.

At an IAC meeting, the IAC reviewed drafts of recommendations on:

• Single-Stock ETFs. In the draft recommendation, the IAC addressed concerns that single-stock ETFs are "running afoul of the general spirit of ETFs," as they do not offer a "diverse basket of securities," and allow retail investors to conduct "regulatory arbitrage" by allowing them to access leverage without margin accounts or options trading permission. To address the risks, the IAC recommended (i) clarifying which ETFs and exchange-traded products ("ETP") qualify for exemptive relief, (ii) considering a more "consistent naming convention" for ETF and ETP types, (iii) pursuing enforcement actions against investment advisers and broker-dealers that recommend ETFs and ETPs that are "inappropriate for clients" and (iv) requiring single-stock and leveraged ETFs to produce a performance graph that compares the ETF with the underlying reference asset at a point of sale.
• Proposed Amendments to Exchange Act 13d-g and Proposed Rule 10B-1. In the draft, the IAC recommended the SEC revise proposed amendments to Exchange Act Sections 13(d)("Reports by Persons Acquiring More Than Five per Centum of Certain Classes of Securities") and 13(g) ("Statement of Equity Security Ownership")(see previous coverage) by (i) shortening the filing deadline to five business days instead of calendar days and (ii) shortening the reporting period for the initial filing of Schedule 13G by qualified institutions investors and exempt investors to 45 days after the quarter. The IAC also recommended that the SEC amend proposed new Rule 10B-1 ("Reporting of large positions in security-based swaps")(see previous coverage) by basing the reporting thresholds for security-based swaps on percentages rather than a fixed dollar amount.
• Registered Investment Adviser Oversight. In the draft, the IAC recommended the SEC request authorization from Congress to allow the SEC Division of Examinations to impose user fees on investment advisers to fund the Division’s investment adviser examination program. In addition, the IAC recommended the SEC adopt a rule requiring investment advisers to undergo a compliance exam to be conducted by a third party and then submitted to the SEC for review.

Statements

In separate remarks:

• SEC Chair Gary Gensler emphasized the importance of compliance with existing standards of conduct regarding "complex and high-risk products," such as single-stock ETFs. He cautioned that single-stock ETFs can present unique risks to retail investors by creating exposures that resemble that of buying shares on margin.
• SEC Commissioner Hester M. Peirce asked the IAC to further consider (i) whether increased clarity has already been provided on single-stock ETFs and whether the SEC should facilitate greater use of technology to help investors understand their product choices, (ii) the potential for economic activists to be discouraged by shortened 13D reporting data and (iii) how user fees would be set and whether it would be appropriate to "outsourc[e] a key government function" by utilizing third-party examinations.